Surprising Contraction: Japan’s Economy Shrinks More Than Anticipated in Q3

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Japan’s economy faced a more significant contraction than anticipated in the July-September period, as revealed by provisional government data on Wednesday. The provisional gross domestic product (GDP) witnessed a decline of 2.1% compared to the same period last year, in stark contrast to the 4.8% expansion recorded in April-June. This contraction surpassed expectations, which had predicted a more moderate 0.6% decline according to a Reuters poll.

Moreover, Japan’s economy contracted by 0.5% in the third quarter compared to the previous quarter, following a 1.2% expansion in the second quarter from the first. This downturn also exceeded expectations for a 0.1% contraction. These declines mark the first contraction for Japan in four quarters, highlighting the volatile economic trend since the onset of the Covid-19 pandemic in early 2020. The economic landscape has been characterized by alternating periods of expansion and contraction.

The challenging scenario poses intricate challenges for the Bank of Japan, especially as Governor Kazuo Ueda contemplates a potential exit from its ultra-easy monetary policy. Simultaneously, it strengthens the case for the Japanese government’s substantial 13.2 trillion yen ($87 billion) economic package. This comprehensive package is designed to include subsidies and payouts to low-income households, aiming to alleviate the impact of soaring energy and utility bills while addressing the challenge of rising living costs.

The softer GDP print was attributed, in part, to weaker-than-expected domestic capital expenditure, which contracted by 0.6% in the third quarter compared to the second quarter. This contrasted with expectations for a 0.3% expansion, according to the same government release. Private consumption in Japan remained stagnant in the third quarter compared to the previous quarter, with both domestic and foreign demand exerting pressure on the economy. The economic landscape underscores the delicate balance the Bank of Japan needs to strike in navigating an exit from ultra-easy monetary policies while responding to the economic challenges posed by global and domestic factors.